Morningstar | Southwest Airlines Flies Through a Turbulent 2Q
Despite a difficult second quarter, no-moat Southwest’s results beat consensus expectations and were well received by the market. We retain our fair value estimate after updating our model with management’s latest guidance. The bill for Southwest’s April Flight 1380 accident was close to $100 million in passenger revenue and a few points of revenue per available seat mile, or RASM. Management anticipates that accident-imposed headwinds will dissipate through the third quarter. Lukewarm second-quarter results included flattish total operating revenue, coupled with a slight decline in passenger revenue. Southwest still looks on track to reach our 4% year-over-year passenger revenue growth forecast for 2018.While costs per available seat mile, or CASM, rose marginally during the first half of 2018, we expect costs to accelerate during the back half of the year due to higher fuel and labor, placing total operating costs above $19.2 billion for 2018. Management’s guidance supports our forecast, given the $2.21 fuel cost per gallon guided for the third quarter. Independent of fuel and special items, CASM-ex for Southwest rose less than 2%, leaving our year-end projection for CASM-ex in play.
Second-quarter operating margins slipped to 17% from 21% in 2017, and Southwest joined the chorus of carriers vowing to elevate margins through capacity restraint. Third-quarter guidance also includes flattish year-over-year RASM, with an aggressive sales campaigns discounting fares and erasing 50 basis points of initial RASM growth. Management’s latest full-year guidance brings 2018 capacity growth to 4% for 2018, down from initial guidance of 5%. The company’s latest revenue guidance brings projected year-end results closer to our modeled 6% top-line growth and full-year margin decline. Management’s update notwithstanding, we still project operating margins to decline over 200 basis points in 2018. At the midcycle, we expect margins will plateau below 15%.
Southwest Airlines operates Southwest Airlines, a passenger airline that provides scheduled air transportation in the United States and near-international markets. The company has Boeing 737 aircraft in its fleet and serves destinations in various states, the District of Columbia, the Commonwealth of Puerto Rico, and other near-international countries such as Mexico, Jamaica, The Bahamas, Aruba, Dominican Republic, Costa Rica, Belize, Cuba, the Cayman Islands, and Turks and Caicos. The company principally provides point-to-point service, which allows for direct nonstop routing. The company also provides a suite of digital platforms to support Customers' needs prior to and during the course of their travel.
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